Vertical transfers and tax competition: does trade integration matter?
- PDF / 1,794,174 Bytes
- 23 Pages / 439.37 x 666.142 pts Page_size
- 45 Downloads / 174 Views
Vertical transfers and tax competition: does trade integration matter? Thierry Madiès1 · Emmanuelle Taugourdeau2 Received: 11 October 2018 / Accepted: 10 March 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract Our paper presents a model of decentralized leadership with fiscal equalization and imperfect trade liberalization. The degree of trade integration (reflected by trade costs) turns out to have an effect on both state corporate taxes and ex-post vertical equalization transfers. Our main results are the following: when public goods are highly valued by the citizens of the federation, ex post equalization transfers are welfare enhancing compared to tax competition, whatever the degree of trade integration. However, when citizens do not have strong preferences for the public good, ex post vertical transfers turn out to be welfare deterioring for low levels of trade integration while they are welfare improving compared to tax competition when trade integration is sufficiently deep.
1 Introduction There is a growing literature dealing with the effects of decentralized leadership on the efficiency of public good provision in federations (representative papers are those by Caplan et al 2000; Köthenbürger 2004, 2007; Silva 2014, 2015; Silva et al 2016). Decentralized leadership refers to a situation where self-interested state governments act as first movers and anticipate how the federal government will react to their fiscal policies. The underlying assumption is that state governments are able to pre-commit vis-à-vis the federal government.1 Examples of decentralized leadership arrangements include the relationships between European member states and 1 The decentralized leadership assumption leads of course to a radical change of perspective with respect to the “top-down” literature (Dahlby 1996; Boadway and Keen 1996; Boadway et al 1998) which implicitly assumes that the federal government can commit itself towards sub-national governments and that well-designed federal transfers are able to internalize inter-jurisdictional externalities, which is generally welfare-improving.
* Emmanuelle Taugourdeau emmanuelle.taugourdeau@ens‑paris‑saclay.fr Thierry Madiès [email protected] 1
Université de Fribourg, Bd de Pérolles 90, 1700 Fribourg, Switzerland
2
CNRS, CREST, ENS Paris-Saclay, 5 Av Henry Le Chatelier, 91120 Palaiseau, France
13
Vol.:(0123456789)
T. Madiès, E. Taugourdeau
the European Union (Nitsch 2000), the Russian Oblasts and the federal government of Russia and the Canadian provinces of British Columbia and Alberta vis-à-vis the Canadian federal government (see Köthenbürger 2007 for more details). More generally, federations assembled for historical reasons in a bottom-up process involve decentralized leadership. All theoretical papers about decentralized leadership focus on inter-jurisdictional spill-overs and fiscal externalities arising from factor mobility but ignore the effects of trade integration on the efficiency of (ex-post) federal policies. Nevertheles
Data Loading...
